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consumer&#39s view

William Hague is on to a winner with his pledge to abolish tax on investments for basic-rate taxpayers. When was the last time anyone can remember a tax being abolished without it being replaced with something equally vicious?

Can anyone except tax experts understand Chancellor Gordon Brown&#39s proposals for child and pensioner tax credits? Nice one, William. A few more proposals like this and you will be into Number 10 before Ffion has had even five minutes to decide on the wallpaper.

Investment income tax is cheap to cut out. With the fall in interest rates and yields on shares and bonds diving in recent years, the tax take from investment income has been declining sharply.

If Hague were to do away with tax on investment income entirely, it would currently cost no more than £5bn out of a total income tax take of £100bn.

The other important point is that simple abolition is a tax change that everyone can understand. Tax experts have long been saying that the tax system is incomprehensible even for accountants and the chances of your granny understanding how to gross up her building society interest to calculate age relief clawback and potential liability to higher-rate tax is clearly non-existent.

Complexity might just be acceptable if the Inland Revenue was prepared to guarantee that if it worked out the figures for granny, the calculations would be correct.

But since it is not prepared to give such an undertaking, the current system is wholly unacceptable, not to say largely unworkable.

Only last year, the Revenue admitted there were mistakes in the self-assessment form which meant that many individuals with dividend income had paid too much tax – and they had no ways of identifying who these people were.

Anything that simplifies the tax system and leaves more cash in people&#39s pockets will be welcomed with open arms. But why stop at removing tax on investment income for basic-rate taxpayers? Any Chancellor who had bothered to look at the Revenue annual report would be able to see that 50 per cent of the lowest-earning taxpayers provide only 12 per cent of the total income tax take of £100m.

Why not remove some 13 million individuals from taxation altogether, make the Revenue&#39s job simpler and recoup the lost revenue with higher VAT? A 1 per cent rise in VAT raises about £3bn in tax so it would not take much of a hike to replace most of the lost income tax.

Moreover, it is a very cheap tax to collect. Some 80 per cent by value of all VAT is paid by the top 100 companies. VAT is not charged on housing, food, travel and children&#39s clothes, the major outgoings among lower-income groups. So a switch to indirect taxation would benefit these individuals considerably.

It would also have the beneficial side effect of getting rid of a sizeable number of Revenue civil servants. And therein lies the rub. The Revenue advises the Government on taxation policy and has a vested interest in keeping the system complex.

Only the Revenue could have devised Isas and it was a Revenue team charged with this responsibility. There is also an ethos among Revenue policymakers that taxation must be entirely equitable (and preferably elegant).

In the interest of making sure that no one loses out even to the slightest degree, taxation proposals from the Revenue tend to be complex rather than going for the broad-brush approach. It is time for a little common sense.

Why not abolish capital gains tax, which raises only £3bn and is totally incomprehensible? This would allow a few more Inland Revenue slaves to be released.

If we are to compete in world financial markets, it is imperative that stamp duty on share transactions is removed. There is more than one way of skinning a rabbit and it is not beyond the wit of the tax experts to devise ways of replacing these relatively small amounts of lost revenue with other taxes which are more broadly based, cheap to collect and equitable.

Go on, Willie, you are on to a winner here.


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